Here's What Wall Street Must See Before Palantir Stock Can Rally Again

Palantir Technologies (NASDAQ: PLTR) has done almost everything that investors asked of it.

The company is growing rapidly. It's generating meaningful profits. And demand for its artificial intelligence (AI) software continues to accelerate. Yet the stock remains well below its late-2025 peak. So what's holding it back? The answer probably isn't the lack of another blockbuster earnings report.

Instead, I think Wall Street wants answers to three important questions before becoming bullish on the stock again.

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Can Palantir keep winning commercial customers?

If there's one number investors should keep an eye on with regards to Palantir, it is the company's U.S. commercial revenue.

For years, Palantir's biggest strength was its tight relationship with Washington, D.C., which had helped it win numerous government contracts. Yet that was also the source of much criticism of the company. While those contracts provided it with stability, they also led many investors to question how large a business that was so reliant on a single customer could become.

That narrative is changing. In its latest reported quarter, U.S. commercial revenue surged more than 130% year over year to $595 million. Comparatively, U.S. government revenue grew by "just" 84% to $687 million.

That's a great start. But Wall Street isn't looking backward. It's looking forward. The question now is whether Palantir will be able to sustain strong commercial growth after the initial wave of enterprise AI adoption.

If it can, investors may begin viewing Palantir less as a niche government contractor and more as one of the leading enterprise AI software companies. That would be a meaningful shift that could change the stock price's trajectory.

Can earnings finally catch up with the valuation?

The second question has nothing to do with technology and everything to do with valuation.

Palantir's recent share price decline doesn't necessarily mean investors have lost confidence in the business. Instead, many have become less willing to pay such a large premium for anticipated future growth. For perspective, the stock still trades at a premium valuation, with a price-to-earnings ratio of 141 (as of this writing).

That's why the next phase of Palantir's story can't be simply about growing revenue. It will have to be about growing earnings. The idea is simple. Expensive stocks become more attractive when the underlying business keeps improving, while the stock goes nowhere.

We've seen this before. After the dot-com bubble burst, companies like Microsoft spent years growing earnings while their share prices moved very little. Eventually, the businesses caught up with their valuations, laying the foundation for another long period of strong shareholder returns.

In other words, Palantir needs to keep executing, and it needs to grow its profitability over time.

Can Palantir become a true software platform?

Whether Palantir can become a widely used AI platform provider may be the most difficult question of all to answer.

It has already proven it can solve complex problems for its customers. Now investors want proof that it can do so at scale. Products like the Palantir Artificial Intelligence Platform (AIP) suggest the company is moving in the right direction. Rather than relying as heavily as it used to on customized deployments, Palantir is increasingly offering repeatable software that can be adopted across multiple industries.

If it continues down this path, its business model would become much more scalable. And scalable software platforms tend to enjoy stronger operating leverage, wider margins, and longer growth runways than businesses that rely heavily on customized implementations.

In other words, investors aren't just betting on AI. They're betting that Palantir can become one of the defining enterprise software platforms of the AI era.

What does it mean for investors?

Palantir's recent stock performance has been disappointing, despite the business's ongoing strong performance. Its latest results suggest demand remains strong, commercial adoption continues to accelerate, and management is executing well.

This suggests that investors are becoming more cautious about the company's long-term prospects.

For the stock price to rally again, Palantir will need to exceed investors' current expectations, largely by sustaining commercial business growth, delivering massive earnings expansion, and continuing to transform AIP into a highly scalable software platform.

For now, investors should spend less time watching its daily share price movements and more time watching its progress on those three aspects of the business.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool has a disclosure policy.